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Franchise Tax Board

ANALYSIS OF ORIGINAL BILL


Author: Correa, et. al Analyst: Darrine Distefano Bill Number: AB 708
See Legislative
Related Bills: History Telephone: 845-6458 Introduced Date: February 19, 2003

Attorney: Patrick Kusiak Sponsor:

SUBJECT: Enterprise Zones/Extends to All Zones 20-Year Designation Period

SUMMARY

This bill would allow all enterprise zones (EZ) to be designated as an EZ for 20 years if certain criteria
are met.

PURPOSE OF THE BILL

It appears that the purpose of the bill is to allow EZs designated after 1990 to be eligible to have the
EZ designation period extended.

EFFECTIVE/OPERATIVE DATE

This bill would be effective and operative January 1, 2004.

POSITION

Pending.

ANALYSIS

FEDERAL/STATE LAW

Existing federal law provides for the existence of empowerment zones and enterprise communities to
provide economic revitalization of distressed urban and rural areas.

Under the Government Code, existing state law allows the governing body of a city or county to apply
for designation as an EZ. Using specified criteria, the Technology, Trade, and Commerce Agency
(TTCA) designates EZs from the applications received from the governing bodies. EZs are
designated for 15 years. Currently, TTCA has designated 39 of the authorized 42 EZs.

An EZ designated before 1990, may have its designation period extended to 20 years if it meets the
following requirements:
• The EZ received a superior or passing audit from TTCA.
• An updated economic development plan is submitted to TTCA that justifies the additional
five-year designation period.

This extension does not apply to EZ’s designated after 1990.


Board Position: Department Director Date
____ S ____ NA ____ NP Gerald H. Goldberg 04/15/03
____ SA _ ___ O ____ NAR
____ N ____ OUA X___ PENDING

04/18/03 9:07 AM
LSB TEMPLATE (rev. 6-98)
Assembly Bill 708 (Correa, et. al)
Introduced February 19, 2003
Page 2

Under the Revenue & Taxation Code, existing state law provides special tax incentives for taxpayers
conducting business activities within the EZ. These incentives include a sales or use tax credit, a
hiring credit, a business expense deduction, a net interest deduction, special net operating loss
treatment, and a tax credit for employees working in an EZ.

THIS BILL

This bill would extend the designation period for EZs. As a result, EZs created after 1990 would also
be eligible to have the designation period extended from 15 years to 20 years if they meet specified
criteria.

Based on information from TTCA, the following EZ’s would be eligible for the extended designation
period: Altadena/Pasadena; Antelope Valley; Coachella Valley; Delano; Kings County; Lindsay; Long
Beach; Merced/Atwater; Oakland; Oroville; Richmond; Army Depot (Sacramento); San Ysidro/Otay
Mesa; San Francisco; Santa Ana; Shafter; Shasta Metro Redding/Anderson; Shasta Valley Siskiyou
County; Stockton; and Watsonville.

IMPLEMENTATION CONSIDERATIONS

Implementing this bill would not significantly impact the department’s programs and operations.

TECHNICAL CONSIDERATIONS

Section 7085 of the Government Code requires TTCA to provide a report to the Legislature on the
effectiveness of the EZ program. Before the conversion of program areas (PA) to EZs, this section
had the requirements for the designation of a PA. The reference to this section on page 4, line 6, is
no longer applicable, and should be deleted.

Also, the reference to “Section 7073” should be deleted and replaced with the term “this section” to
maintain internal consistency.

LEGISLATIVE HISTORY

AB 516 (Matthews 2003/2004) would expand the 20-year designation to include an EZ located in a
rural area after 1990. This bill is currently in the Assembly Appropriations Committee.

SB 172 (Ducheny 2003/2004) would, among other things, allow all EZs to be designated for 20 years.
This bill is currently referred to both the Housing & Community Development Committee and the
Senate Revenue & Taxation Committee.

AB 1846 (Correa, 2001/2002) was identical to this bill. This bill failed to pass out of the Senate
Revenue & Taxation Committee.

OTHER STATES’ INFORMATION

Currently, 29 other states have economic development areas that allow similar tax related incentives to
those provided in California’s economic development areas. However, no information was found stating
the length of time other states designate economic development areas.
Assembly Bill 708 (Correa, et. al)
Introduced February 19, 2003
Page 3

FISCAL IMPACT

This bill would not significantly impact the department’s costs.

ECONOMIC IMPACT

Revenue Estimate

Revenue Impact
Enterprise Zone Extensions
($ Millions)
Fiscal Year 2007-08 2008-09 2009-10
Revenue Loss -10 -20 -35

This bill does not consider the possible changes in employment, personal income, or gross state
product that could result from this measure.

Revenue Discussion

Revenue losses for the extension of EZ status would largely depend on the amount of qualifying
property purchased subject to the sales tax, the amount of wages paid to qualifying employees, and
the state tax liabilities of employers claiming these tax benefits.

The revenue impact of the proposed legislation would first occur in 2007, the original year of
expiration for 1991 designations. Under current law, some businesses in expired EZs would have
unused carryover credits and net operating losses (NOLs) that would continue.

For 2007, the current law revenue impact is $79 million. This includes $63 million in continuing
losses from the 21 existing EZs and $16 million for 18 expired EZs that only use carryover credits and
NOLs.

Under the proposed law, the total impact for the remaining 26 EZs (13 EZs that were designated in
1986 would conclude their 20-year designation in 2007) would be $89 million. In 2007, the first five
EZs that were designated after 1990 and scheduled for expiration would be extended under this bill.
Therefore, it is estimated that this bill would result in an additional loss of $10 million in the first fiscal
year. As EZs continue to reach their normal expiration dates of 2008 through 2012, the number of
EZs impacted by this bill would continue to increase. As a result, the revenue impact of this bill would
also continue to increase over subsequent years.

Current law permits another EZ to be designated upon the expiration of an existing EZ, which was
taken into account in this analysis.

LEGISLATIVE STAFF CONTACT

Darrine Distefano Brian Putler


Franchise Tax Board Franchise Tax Board
845-6458 845-6333
Darrine_Distefano@ftb.ca.gov Brian.Putler@ftb.ca.gov